Chapter 11 – Sale of a Partnership Interest
Reading:
Paragraphs 1101-1103.
1. Burlington Enterprises LLC is treated as a partnership for purposes of the federal income tax. It has the following assets and liabilities:
Basis / FMVCash / $39,000 / $39,000
Land / 50,000 / 200,000
Other capital assets / 100,000 / 190,000
Totals / $189,000 / $429,000
Recourse liabilities / $84,000 / $84,000
Capital, B / 35,000 / 115,000
Capital, L / 35,000 / 115,000
Capital, T / 35,000 / 115,000
Totals / $189,000 / $429,000
The three partners share equally in profits, losses and capital. T is considering the sale of her one-third interest in the partnership for $115,000 cash. The buyer is unrelated to either T or the partnership.
a. What will be the amount realized (i.e., selling price) by T on the sale to the unrelated buyer?
b. What is T’s basis in the partnership interest at the date of sale?
c. How much gain or loss will T recognize on the sale?
d. What will be the buyer’s tax basis in the newly acquired interest in Burlington Enterprises?
2. Five years ago, Farley Walton purchased a 30% interest in Oak Motte Partners, a real estate development partnership. He paid $50,000 for a 30% interest in capital, profits and losses. This year, at the end of the year, Farley sold his interest in the partnership for $250,000 cash to an unrelated buyer. The following table summarizes Farley’s distributive share of partnership profits and losses, as well as distributions received and additional capital contributions made by Farley over the five year period:
Year / Profit/(loss) / Additional Capital Contributions / Distributions Received1 / ($18,000) / $50,000* / 0
2 / (15,000) / 7,500 / 0
3 / 25,000 / 0 / 0
4 / 37,000 / 0 / 45,000
5 / 58,000 / 0 / 25,000
* The Year 1 capital contribution represents Farley’s initial contribution to acquire his interest in the partnership.
Assume that Farley has not retained sufficient records to support the information summarized in the above table. He has not retained copies of Schedules K-1 received from the partnership over the years, and has been haphazard at best in keeping records of payments made to or received from the partnership. Farley’s tax preparer, however, has a copy of the Schedule K-1 received this year.
a. What will be the balance in Farley’s capital account at the end of Year 5, as reported on Schedule K-1 received for that year? (Assume the capital account has been properly maintained over the entire period).
b. What is Farley’s tax basis in his partnership interest at the end of Year 5?
c. How much gain will he report in connection with sale of that interest?
3. Assume in question 2 above, that Oak Motte Partners has liabilities outstanding of $500,000. All other information is the same.
a. What is Farley’s tax basis in his Oak Motte interest at the end of year 5?
b. How much gain will he report in connection with sale of that interest?
3. Wolcox Partners has the following balance sheets:
Basis / FMVCash / $15,000 / $15,000
Investment Securities / 30,000 / 36,000
Depreciable Equipment (original cost $58,000) / 22,000 / 40,000
Land / 38,000 / 95,000
$105,000 / $186,000
Capital, D / $35,000 / $62,000
Capital, E / 35,000 / 62,000
Capital, F / 35,000 / 62,000
$105,000 / $186,000
a. What are the partnership’s total “hot assets” for purposes of §751(a)?
b. Assume that D sells her interest in the partnership for $62,000. How much gain will she recognize on the sale?
c. What will be the character of D’s gain?
4. The RKO Partnership has the following balance sheets at December 31:
Basis / FMVCash / $15,000 / $15,000
Accounts Receivable / 0 / 36,000
Inventory / 22,000 / 40,000
Land / 140,000 / 95,000
$177,000 / $186,000
Capital, R / $59,000 / $62,000
Capital, K / 59,000 / 62,000
Capital, O / 59,000 / 62,000
$177,000 / $186,000
On that date, O sells his interest in the partnership to unrelated buyer G for $62,000.
a. How much gain or loss will O recognize in connection with the sale to G?
b. What will be the character of O’s gain or loss?
5. The DEF partnership has the following balance sheets:
Basis / FMVLand / $40,000 / $52,000
Inventory / $20,000 / $40,000
Unrealized Rec. / $0 / $10,000
Liabilities / $12,000 / $12,000
Capital, D / $16,000 / $30,000
Capital, E / $16,000 / $30,000
Capital, F / $16,000 / $30,000
$60,000 / $102,000
If partner D sells his partnership interest (holding period = two years) to G for $30,000 cash, how much income will D recognize, and what will be its character?
8. F sells her interest in the equal FG partnership for $20,000 cash. F’s basis, including her share of partnership liabilities, is $40,000. Partnership liabilities are $65,000, and are split equally between F and G before the sale. F has owned the partnership interest for more than one year. The partnership owns a collection of valuable antiques (holding period: two years) that have a FMV of $50,000 and a basis of $20,000. What is F’s gain or loss, and what is its character?
Would your answer be any different if her holding period for the partnership interest was less than one year?
What would your answer be if her holding period was long term, and the partnership had held a stamp collection (holding period: 18 months) with a FMV of $20,000 and a basis of $30,000, instead of the antique collection?
9. Maria is a 25% partner in Anton Partners. Anton has the following balance sheets:
Basis / FMVCash / $60,000 / $60,000
Bonds, stocks, other investments / $27,000 / $54,000
Investment in Breakout Partnership / 145,000 / 270,000
$232,000 / $384,000
Capital, Maria / $ 58,000 / $96,000
Capital, Other Partners / 174,000 / 288,000
$232,000 / $384,000
Anton has a 15% interest in the profits, losses and capital of Breakout Partnership. Breakout Partnership’s balance sheets are as follows:
Basis / FMVCash / $150,000 / $150,000
Inventory / 270,000 / 540,000
Unrealized Rec. / 0 / 300,000
Other Assets / 550,000 / 810,000
$970,000 / $1,800,000
Liabilities / $500,000 / $500,000
Partner Capital / 470,000 / 1,300,000
$970,000 / $1,800,000
a. If Maria sells her interest in Anton Partnership to an unrelated buyer for $96,000, how much gain will she recognize?
b. What will be the character of Maria’s gain on the sale?
Chapter 12 – Partnership Distributions
Reading:
Paragraphs 1201-1205.
1. W is a partner in the equal WXYZ partnership. At the beginning of the year, his basis in his partnership interest is $40,000. On Feb. 1, W takes a draw against earnings of $30,000. On June 1, the partnership pays off $60,000 of debt. On Sept. 1, W gets a distribution of cash of $30,000 that is not a draw against earnings. The partnership’s income from the year is $200,000. What is the effect of each of these items on W’s basis?
2. If a partner is distributed encumbered property, what is the ordering in time of the following for tax purposes: (1) the assumption of the debt by the distributee partner, (2) the reduction in the distributee partner’s share of the partnership debt, and (3) the distribution of the property?
3. A gain from any distribution, whether liquidating or current, will occur under what circumstances? Can a partner recognize a loss from a nonliquidating distribution?
4. Partner N of the calendar-year LMN partnership has a basis in her partnership of $50,000 at the beginning of the year. She is distributed cash of $40,000 on Feb. 1 and property with a FMV of $30,000 and a basis of $30,000 on Nov. 1. Neither of these distributions is considered a draw on current partnership income.
i. What is her gain, if any, her basis in her partnership after each distribution, and her basis in the property?
ii. What would your answer be if the dates of the two distributions were switched?
iii. What is your answer if the cash and property were distributed simultaneously?
5. Partner A received the following in a nonliquidating distribution:
Basis FMV
Cash $20,000 $20,000
Inventory Item 1 $15,000 $18,000
Inventory Item 2 $10,000 $6,000
Capital Asset 1 $20,000 $7,000
Capital Asset 2 $10,000 $20,000
$75,000 $71,000
i. Assume A’s basis in the partnership before the distribution was $40,000. What would the bases of the assets be to A?
ii. Assume A’s basis in the partnership before the distribution was $60,000. What would the bases of the assets be to A?
6. When will a partner recognize a loss on a distribution from a partnership?
7. In a liquidating partnership distribution, the partner only got cash and ordinary income property distributed to her, and the total cash and basis of ordinary income property distributed to her was greater than her basis in her partnership interest. How would the outside basis be allocated to the distributed assets.
8. Partner Z of the XYZ partnership receives a liquidating distribution of the following:
Basis FMV
Cash $40,000 $40,000
Inventory $30,000 $45,000
Unrealized receiv. $50,000 $45,000
i. Z’s basis in her partnership interest was $95,000. What is her gain or loss and the bases of the assets distributed to her?
ii. Assume Z’s basis in her partnership interest was $130,000. What is her gain or loss and the bases of the assets distributed to her?
9. In a liquidating partnership distribution, the partner got cash, ordinary income property, and other property distributed to her, and the total cash and bases of property distributed to her was less than her basis in her partnership interest. How would the outside basis be allocated to the distributed assets?
8. The DEF partnership has the following balance sheet:
Basis / FMVCash / $48,000 / $48,000
Inventory / 24,000 / 60,000
$72,000 / $108,000
Capital, D / $24,000 / $36,000
Capital, E / 24,000 / 36,000
Capital, F / 24,000 / 36,000
$72,000 / $108,000
If partner D gets a cash distribution in liquidation of $36,000, what will be the tax effects to D and the partnership?
9. The GHI partnership has the following balance sheet:
Basis / FMVCash / $12,000 / $12,000
Inventory / 48,000 / $60,000
Land / 12,000 / 36,000
$72,000 / $108,000
Capital, G / $24,000 / $36,000
Capital, H / 24,000 / 36,000
Capital, I / 24,000 / 36,000
$72,000 / $108,000
If partner G gets distributed the land in complete liquidation, what will be the tax effects to G and the partnership?
10. The GHI partnership has the following balance sheet:
Basis / FMVInventory / $48,000 / $72,000
Land / 24,000 / 36,000
$72,000 / $108,000
Capital, G / $24,000 / $36,000
Capital, H / 24,000 / 36,000
Capital, I / 24,000 / 36,000
$72,000 / $108,000
If partner G receives a distribution consisting of ¼ of the inventory, reducing her interest in the partnership from 1/3 to 1/5, what will be the tax effects to G and the partnership?